Back to School, Back to Basics: 4 Keys to Successful Ecosystem Markets

Welcome to our first blog post! We are honored to be considered leaders in market- and incentive-based approaches to conservation, and we hope this blog becomes a resource for those who want to learn about our perspectives and work to help drive targeted, high-quality conservation that supports strong local communities and economies.

In the spirit of those heading back to school this time of year, this inaugural post brings us back to the basics – the role of ecosystem markets and the four keys to making them work.

When we explain the ecosystem market approach we often start with the question: would Mother Nature agree with our current pattern of spending for conservation and environmental compliance? Probably not. Billions of dollars are spent building concrete and steel solutions to water quality problems that are inherently linked to watershed-scale degradation. Technological fixes alone are not enough to protect or restore clean water and health habitats for fish and wildlife. We also need to invest in the natural systems that serve as their foundation.

When we can confidently articulate the benefits that nature provides (or quantify ecosystem services), we can confidently invest in making natural systems work better through conservation and restoration. Ecosystem service markets link those who want to improve water quality or habitat (often because of a legal obligation) with those best able to do so (often on private lands), thereby increasing the volume and effectiveness of our investments in the environment. (As an aside, when we use the term market, we’re referring to the negotiations, relationships, and conversations that occur to make ecosystem service investments. We acknowledge ecosystem markets differ from the purer sense of market — we know we’re not trading derivatives or commodities– so don’t let the word market get you caught up).

Willamette Partnership has helped put the science and process in place for many ecosystem service markets, proving that these approaches can help shift investments for compliance with environmental regulations like the Clean Water Act and Endangered Species Act to conservation and restoration projects that are better for the environment and more cost effective for businesses.

What we’ve learned in our experience building ecosystem markets are four keys to success: clear goal, clear demand, clear path, and clear risk.

What we’ve learned in our experience building ecosystem markets are four keys to success: clear goal, clear demand, clear path, and clear risk.

Let’s explain this more in detail:

Clear Goal. Any policy tool, especially a market, is only as strong as the clarity of goal it is aiming for. A goal could be a 40% reduction in phosphorous reaching a stream, protecting 2,000 acres of wildlife habitat, or reducing disparities in access to open space.

Clear Demand. Demand for environmental benefits is often driven by regulation or the possibility of future regulation, or investment may be voluntary. Whether it’s a regulator or an investor driving demand for an ecosystem market, they will need to clearly communicate that they like the approach and that it meets their needs.

Clear Path. There needs to be a way to quantify environmental benefits in terms that those demanding the benefits understand. Protocols will also need to verify that credits are true, track it over time, and provide credibility and transparency that are important to stakeholders like environmental organizations.

Clear Risk. Finally, most landowners that would provide credits in ecosystem markets are not in a position to take the risk associated with providing the assurances of project success that investors need. Third parties willing to provide the upfront financing and assure the delivery of compliance-grade projects opens up a lot of doors and is the last gear needed to get an ecosystem market going.

With the four key pieces in place, additional success stories are possible like in the City of Medford.

So how do we successfully leveraging markets for conservation? The City of Medford provides a perfect example. In order to comply with the Clean Water Act, the City was considering a $16 million holding pond to cool the warm, but otherwise clean, water that they discharge in the Rogue River (clear goal: meeting the effluent limits in the permit). The warm water would be held in the pond during the hottest week or so each year, and then pumped back into the river. Using Willamette Partnership‘s tools to quantify the environmental benefits of restoration, and our protocols that verify those benefits are real (clear path), an alternative was identified where riparian forests could be restored to provide the same water quality benefits at half the cost (estimated $8 million)! Beyond saving the city money, riparian restoration would also sequester carbon and improve stream habitat. Following approval for thermal trading by Oregon’s DEQ (clear demand), Medford chose the restoration and worked with The Freshwater Trust (clear risk, a third-party providing assurances of project success the City needed) to purchase the ecosystem services provided by riparian forests from local landowners. The City is able to meet its permit obligation, and do so in a way that is consistent with what the watershed really needed.

Ecosystem markets are composed of many moving parts, and they aren’t a silver bullet or the right tool in every situation. But where appropriate, markets and market-based approaches have the potential for vastly improved outcomes for ecosystems or communities.

Do you think there are more keys to successful ecosystem markets? We’d love to read your thoughts below.

2 Comments

Thanks for the post, appreciate the simple breakdown of the four components to making an ecosystem market work. The last key got me thinking. In your City of Medford example, how does the market mitigate the risk that the riparian restoration does not adequately offset the temperature rise due to the City’s effluent? I can appreciate that the local landowners’ financial risk is mitigated by Freshwater Trust’s guarantee of project success (I assume in the form of paying them for allowing planting on their lands whether or not the plantings survive and have the desired effect). And while your post didn’t speak to it directly, I infer the City’s regulatory and financial risk if found out of compliance, is mitigated by ODEQ’s approval of thermal trading. However, the ultimate risk is to our ecosystem if the Rogue’s stream temperatures rise despite the restoration efforts. Who takes on that risk? Seems like we do as a society. Perhaps that’s the ask of all of us: to be willing to try this different approach to achieving the outcome we want?

Really interesting question, Matt. You’re right that trying new things means moving in uncertain waters (excuse the pun!), and as you suggest, we do think it’s worth taking on some risk as a society to get investment that targets the root cause of warming rivers and streams. That said, it’s important to identify risks and address them however we can.

First, it’s important to recognize the difference between thermal load (unit of pollution) and temperature (water quality outcome). Temperature of the river is the result of complex interactions between weather (air temp, rainfall that drives flow levels, etc.), the quantity and temperature of numerous inflows and diversions, and connections with hyporheic flow. The City’s effluent is a tiny portion of the overall thermal load in the Rogue system, so you can expect its effect on the temperature is marginal. You can also expect that offsetting the entire thermal load from the city (whether via chillers or restoration) will not necessarily change the river temperature to a measurable extent.

Next, I’d point out that there’s actually not a whole lot of uncertainty around how much thermal load the city is discharging or how much thermal load the projects will offset. The City measures and reports its discharges, and the dynamics of solar loading with or without a riparian buffer are well understood. This is somewhat unique to thermal load trades. There can be a lot more uncertainty in estimating the reduction in nutrient loadings from farm BMPs.

Finally, there are mechanisms in place to account for risk. ODEQ does use a 2:1 “trading ratio” (the City buys 2 thermal credits for every 1 unit of discharge). This is intended to account primarily for the time lag between when trees are planted and when they will begin providing shade. Depending on who you talk to, it also accounts for uncertainty. That ratio is one way that we cover the risk that the restoration projects don’t provide the water quality benefit that we intended. ODEQ also manages risk by making conservative assumptions. The number of credits the City needs is based on some pretty extreme circumstances – the hottest week of a 10 year period, when the rivers are at their lowest point, and assuming that the City (and its discharge) has grown substantially.